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Feb
12
Stimulus rejects
February 12, 2009 | 3 Comments | Joshua Gans
The Government’s $42b stimulus package has been voted down. Without the support of the Coalition and independent Senator Xenophon, it wasn’t going to happen. The government had budged on other recommendations including bits here and there from the Greens and a reduced level of handouts. Xenophon wanted the Murray-Darling environmental package brought forward.
No one believes that this is the end of the matter but was the government right not to go with Xenophon’s desire. My sense is that the Murray-Darling issue has no bearing on the purpose of the package to stimulate the economy and tying the issues would have been bad policy. Each element should have a stimulus rationale and not some other rationale. I think the unemployment numbers tell us today that the Government can be a little more patient and try and make sure the package makes economic sense than getting into horse trading. Of course, economic sense does not mean it will pass.
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3 Responses to “Stimulus rejects”
[...] Thursday, 12 February, 2009 by Tobias Ziegler The stimulus package has been blocked in the Senate on a 34-34 vote. Commentary from the economists – Peter Martin and Joshua Gans. [...]
[...] Martin, Joshua Gans and Robert Merkel have some early [...]
The perception is of a government in panic not in control. Stopping the bill may give time for someone to point out that the government does not have to go into deficit to fund a stimulus package.
If it wasn’t so serious it would be laughable. The government is going to go into debt because it is funding infrastructure investment in schools along with other “investments”. To do this they are going borrow money from the banks. But the banks do not have any money so where does it come from? Well the government is to going to allow the banks to lend it money they do not have and the money is going to be backed by the government. For this the government is going to pay interest! This is lunacy. To create the money needed for investment there is no need to involve the banks. Get rid of the banks from the loop and we will reduce the risk of inflation as we will not have to print money to pay the interest and the government will not go into deficit. Traditionally banks get into the loop because their normal role is to impose some discipline on how money is spent and to whom they lend it – a role in which they have failed spectacularly.
It is not getting the money into the system that is a problem. It is the spending of the money wisely (to create the best performing assets for as little as possible) that is the issue and Senators are right to think the stimulus package is not a particularly clever way to do this.
As readers of my comments will have heard many times before a sensible way for a government to invest (and spend) money is to do it through a market place. To stimulate the economy the government can stimulate the market place in infrastructure to reduce greenhouse gas emissions. To get buyers in the market place the government gives zero interest loans to those in society who consume little mains electricity (a more sensible criteria for handing out money than most we have heard). People with loans must invest the money in the ghg infrastructure market place.
If a person who gets a loan can’t think of any way to invest it they can sell the loan for anything they can get – but the loan still has to be spent on ghg reducing infrastructure. Throw a lazy 20, 30 however many billion is needed into the economy this way and watch the economy boom and ghg emissions come down. It will not be inflationary as the loans will be spent wisely (creating a productive asset), and the government does not go into debt. Citizens have some debt that they will notionally pay off through future taxes on profits on their investments.